A capital idea: linking the operating and capital budgets in Rockville, Maryland.

• Author: Deckard, Kevin

When a person wishes to make a significant capital acquisition - for a home or a car, for example - the first step typically is to assess how large a loan is affordable. If this step is ignored, the result can be loan denial, thereby thwarting the intended purchase. Even if a loan is obtained under such circumstances, there may be resultant trauma as the individual struggles to come up with the resources to make monthly payments as they come due.

It is reasonable to expect that the capital acquisition processes for a local government should be just as rigorous. In many communities, however, long-range capital improvement plans are put together without first assessing what resources are available to pay for desired projects. The difficulties that such communities face are strikingly similar to those of the individual contending with an exorbitant debt load.

Rockville's Increasing Capital Demands

In recent years, the City of Rockville, Maryland, has been faced with just such a challenge. Rockville, an affluent suburban community just 10 miles from the heart of the nation's capital, was well-positioned to benefit from the region's economic expansion during the 1980s. The privatization emphasis of the Reagan administration fueled a surge of federal contracting for high-tech services. As one of the nation's cultural centers, and as a natural focal point for businesses interested in exploiting the potential of an increasingly global economy, the Washington area became a prime target for corporate relocation. The tranquil, campus-style atmosphere of Rockville's prestigious Research Boulevard served as a magnet for "blue chip" corporations, including General Electric, IBM, Hewlett Packard, MCI, Perkin-Elmer, and General Motors. Meanwhile, the city's main street - Rockville Pike - continued to enjoy success as one of the premier retail centers in the region.

As a result of this development boom, the assessed value of Rockville's tax base tripled during the 1980s. The boom brought new challenges:

* increased volumes of traffic on the city's thoroughfares made high-dollar maintenance commitments imperative;

* demand for new roads and additional lanes for existing roads intensified; and

* recreational facilities were strained to capacity, and citizens clamored for more.

The city's capital improvement program (CIP) grew, bond issues became larger and more frequent, and debt service costs occupied an increasingly large share of the operating budget. At the same time, state and federal mandates restricting the permissible environmental impacts of new road construction led to lengthy delays in completing projects, resulting in outstanding financial commitments to the capital program becoming far greater than just the amounts of new funding portrayed in the annual six-year capital improvements program. This constituted an obstacle to prudent policy-making - since projects put on hold for a few years tended to be forgotten when issues of funding new project ideas were raised - and presented a tremendous potential for overcommitment.

A brief look at some of Rockville's financial data illustrates these trends. Debt service costs in relation to annual expenditures for the city's principal nonenterprise operating funds had risen from 13.6 percent in fiscal year 1982 to 16.6 percent by 1988, while the backlog of prior years' unspent capital appropriations rose from $21.8 million to $34.9 million. The size of the adopted six-year CIP program, representing planned commitments to new projects, rose from $22.6 million to $69 million during this period. When identifying sources of funding for projects in the CIP, therefore, it was necessary not only to come up with $69 million but also to have more than $100 million in financing in order to address carryover funding requirements for prior years' unfinished projects.

Adopting and Implementing Fiscal Policies

It was clear that if Rockville wished to meet such a surge in capital demands gracefully, a disciplined approach to planning and execution was necessary. City officials decided to set forth the tenets of this disciplined approach in the form of a set of financial policies designed to address all key risk areas. Research into practices employed by other jurisdictions across the nation and factors employed by bond rating agencies culminated in city officials preparing a set of 21 fiscal policies for the management of debt and capital improvements. These policies, shown in Exhibit 1, were embedded in city philosophy by mayor and council resolution in...